FHA 40 Year Loan Requirements: Everything You Need to Know About Extending Your Mortgage Term to 40 Years

The FHA 40 year loan modification program allows struggling homeowners with FHA-insured mortgages to extend their loan term to 40 years This can help significantly lower monthly payments and avoid foreclosure, Here’s what to know about FHA 40 year loan requirements and eligibility,

Overview of FHA 40 Year Loans

The Federal Housing Administration (FHA) insures mortgages made by approved lenders. FHA loans typically have lower credit score requirements smaller down payments and more flexible underwriting guidelines compared to conventional loans.

In May 2022 the FHA announced that servicers can now modify FHA loans to a maximum 40 year term. Previously, FHA loan modifications were capped at 30 years. Extending the term to 40 years spreads payments over a longer timeframe reducing the monthly payment.

This new option gives servicers more flexibility to help financially struggling homeowners stay in their homes. It provides an alternative if a 30 year modification doesn’t adequately reduce the monthly payment.

FHA 40 Year Loan Requirements

To qualify for a 40 year FHA loan modification, you must meet the following requirements:

• Have an existing FHA insured mortgage
• Be at least 60 days behind on mortgage payments OR be able to show you will be within 90 days
• State that you are having difficulty making the monthly payment
• Indicate you can afford the modified monthly payment

That’s it. There is no income documentation required. The servicer will calculate the new payment based on a 40 year term to achieve at least a 25% reduction in principal and interest.

Eligibility for FHA 40 Year Loans

The FHA 40 year modification is available for borrowers with owner-occupied principal residences. Second homes or investment properties don’t qualify.

You must have an FHA insured mortgage. Other types of loans like conventional, VA, or USDA loans are not eligible. But the modification can be done on existing FHA mortgages regardless of when they were originated.

Borrowers must be at least 60 days delinquent on their mortgage to qualify. Or, they can show evidence they will become 60 days delinquent within the next 90 days due to documented hardship.

Financial hardship is not required to be proven or documented. But borrowers must indicate they are having trouble making payments and affirm they can manage the modified payment.

How the FHA 40 Year Loan Modification Process Works

An FHA 40 year modification involves recalculating the mortgage balance and re-amortizing it over 40 years at the current interest rate. Here are the steps:

• Contact your servicer – Let them know you are struggling to pay your mortgage and would like help. Don’t apply on your own.

• Eligibility review – The servicer will evaluate if you meet the eligibility criteria outlined above.

• Payment recalculation – The loan balance will be modified to include any unpaid interest, fees, and foreclosure costs. It is re-amortized over 40 years at the current note rate to achieve at least a 25% reduction in the principal and interest payment.

• Modified loan terms – The interest rate stays the same but the term is extended to 480 months. Late fees and penalties are waived in most cases.

• New monthly payment – You begin making the new modified mortgage payment once the loan modification is finalized. This takes 1-2 billing cycles typically.

Benefits of an FHA 40 Year Loan Modification

There are several potential benefits borrowers can realize with an FHA 40 year modification:

• Lower monthly mortgage payment – Spreading the payments over 40 years instead of 30 significantly reduces the monthly principal and interest payments. This improves affordability.

• Interest rate retained – Since it’s a modification not a refinance, your existing note rate is kept. This avoids getting stuck with a higher rate.

• No credit check – Modifications don’t require a credit check. Your credit score doesn’t impact eligibility.

• No income verification – You don’t have to provide pay stubs, tax returns, or other documentation.

• Waived late fees – Most fees and penalties get waived, reducing the amount added to the balance.

• Foreclosure alternative – Modification is often a better option than foreclosure if you can’t keep up with your current payment.

Risks and Drawbacks of a 40 Year FHA Loan

While the FHA 40 year modification can be a lifeline, there are also some potential drawbacks to consider:

• Higher total interest – You’ll pay significantly more total interest over the 40 year term compared to 30 years.

• Slower equity build up – Equity grows more slowly when the loan is amortized over 40 years instead of 30.

• Potentially higher rate – If your current rate is low, your modified rate could be much higher since it uses the current rate.

• Continued FHA insurance – You have to keep paying FHA insurance premiums over the 40 year span.

• Future eligibility – Having a modification on your credit history could impact ability to qualify for future mortgages.

• No cash out – Since it’s not a refinance, you can’t take cash out with a modification.

Alternatives to FHA 40 Year Loan Modification

Some other options to consider before pursuing a 40 year modification include:

• Forbearance – Temporarily suspend or reduce mortgage payments for up to 12 months.

• Repayment plan – Have missed payments added to the loan balance and repaid over time.

• Partial claim – FHA pays up to 30% of unpaid principal balance in exchange for a lien.

• Rate and term refinance – Refinance into a new 30 year loan to get a lower rate and payment.

• Cash-out refinance – Refinance and take equity out to cover missed payments and reset term to 30 years.

• Loan assumption – Transfer mortgage to another borrower who then makes the payments.

• Deed in lieu of foreclosure – Voluntarily transfer ownership of the property to the servicer.

• Short sale – Sell the home yourself and servicer agrees to allow less than full balance to be paid.

The Bottom Line

The FHA’s new option for a 40 year loan modification makes it easier for struggling borrowers to reduce their payments and avoid foreclosure. If you have an FHA loan and are at least 60 days behind, contact your servicer right away to discuss modification options. Make sure you understand the pros and cons, and explore alternatives, before deciding if pursuing a 40 year modified mortgage is the right choice for your situation.